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Bank won’t give any lending value to your foreign assets? Try this

It’s a frustrating problem for companies of all sizes—banks won’t give collateral value to assets located outside Canada. But with EDC’s Export Guarantee Program in place, you can leverage your assets abroad, from work-in-progress to inventory, to get more access to financing. In this blog, you’ll learn:

Congratulations! You just won a contract to sell your goods to a customer overseas. You’ll need to get $100,000 financing from your bank to pay your upfront costs for materials, labour and shipping, but no problem. You own a warehouse valued at $150,000 in the U.S., plus $75,000 of inventory in India. With $225,000 total in collateral, plus the signed contract, what could possibly go wrong?

As it turns out, plenty. Like many exporters who have gone before you, you’ll likely discover that your bank will look at your $225,000 in foreign assets and assign them a security value of exactly… zero dollars. That could leave you scrambling to scrape together the working capital you need to fulfill your contract.

This is a very common—and frustrating—situation for small and medium-sized businesses, and often even for larger enterprises. Most banks are reluctant to give value to assets located outside Canada—be it cash, accounts receivable, inventory, work-in-progress, equipment, plants and warehouses, or international offices or subsidiaries.

Why banks won’t accept your global assets as collateral

It helps to look at the situation from your bank’s point of view. You need more financing, but the bank needs to know its risks are covered. If something happens and you’re unable to pay back your obligation, it’ll be much harder for the bank to recoup their losses by claiming or liquidating collateral assets located outside Canada.

Because they don’t want to take on this risk, your global assets aren’t counted when the bank calculates the value of your assets they’ll include as collateral, which in turn helps determine how much financing they’d typically be willing to provide your company.

Obviously, this means you might come up short for the working capital you need to cover your new contract. But there’s another significant drawback: not being able to include your global assets as collateral means you’ll always be limited in the size and the number of contracts you can take on at one time. That can severely restrict your company’s international growth and ability to scale up.

How EDC can help

Fortunately, Export Development Canada (EDC) has a solution for this problem. Whether you’re already selling abroad, just starting, or you’re an indirect exporter, our Export Guarantee Program is designed to help Canadians leverage their assets and investments outside of the country, so they can get access to more financing with their bank—and EDC is currently the only place in Canada that offers this solution.

Here’s how the Export Guarantee Program works

The Export Guarantee Program shares the risk of your financing with your bank by providing a guarantee to them of up to 100% of the working capital funds you require to support your global assets or investments. As EDC takes on the international risk your bank is unable to support, this means they can assign value to your overseas assets, which makes them more confident about increasing your access to financing. EDC’s Export Guarantee Program enables the bank to have an open view of your balance sheet and not discount those assets that reside outside of Canada.

Here’s another example. Let’s say you have $1 million of inventory in China. Ordinarily, the bank wouldn’t give you any value for this inventory, given it’s located outside Canada. However, with an Export Guarantee Program your bank will assign the same lending value to this inventory as if it were in Canada, which is typically up to 50%. Which gives you access to an additional $500,000 in working capital that you otherwise would not have.

You can also use the Export Guarantee Program for a range of financing needs, from operating lines to investments abroad, including capital expenditures, margining offshore inventory and receivables, or to provide direct support to your foreign subsidiary or office.

Be sure to contact EDC before you go to your bank

Bottom line: my best piece of advice is if you’re selling abroad or thinking of doing so in the near future, contact EDC before you go to your bank. As EDC is a complementary partner of the Canadian banks, we work with them often. By having a conversation with us early on, we can help you understand what type of support we offer your business in its early exporting stages, as well as help you navigate the partnered approach between EDC and your bank. The Export Guarantee Program can benefit all sizes of companies, and we have many other financial solutions as well.